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15th Jul 2015
Brought to you by
ICPA

ICPA is a professional organisation for accountants in practice.

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Rob Ward urges accountants to take extreme care when advising on tax schemes.

The recent brouhaha and debate surrounding tax avoidance schemes shows no immediate signs of abating but it has not changed the accountant’s responsibility to his client to use due care and serve him with the professional competence outlined in the letter of engagement.

As the issues surrounding these schemes have become politicised and HMRC have been left with no option but to challenge, there has been a marked increase in claims being reported by accountants even if they were merely acting as an introducer to a scheme promoter. As ever, the insurance industry has had a knee jerk reaction and either withdrawn cover completely or at least imposed restricted terms (as far as they can) on those practices with any involvement in such schemes.

While tax evasion is illegal, tax avoidance is much less clear cut and while in the past was accepted, some may say even tacitly encouraged by the courts, nowadays it is frowned upon, although still open to interpretation. It ought to be borne in mind that without a clear definition of avoidance it will be the court that decides on the legality or otherwise of a particular scheme. However, in an effort to give some guidance HMRC has aired its views that: “Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – not the spirit – of the law.”

It is important that this is distinguished from tax planning, which is a perfectly legitimate use of tax reliefs for their intended purpose. I would contend that apart from compliance issues this is really why the advice of an accountant is sought by the majority of businesses and individuals. Moreover, in the immediate past, and before the furore over avoidance schemes, the courts’ view was more or less that it was the accountant’s duty to his client to reduce his tax liabilities as far as possible.  It could be argued that the original findings in the Mehjoo case was an example of this (Mehjoo v Harben Barker [2004] EWCA Civ 358).

It never ceases to surprise me how little most insurers seem to understand what it is that accountants actually do, and equally how little accountants do to protect themselves before relying on policy coverage to dig them out of a hole of their own making.

Claims for professional negligence are based on whether you have assumed a responsibility towards your client i.e. a duty of care exists and whether advice given was relied on by your client.

To determine whether a duty of care exists the three tests laid down in the Caparro case in 1990 are still used. These are:

• The harm caused by the negligent act must be reasonably foreseeable.

• There must be a reasonable proximity between parties.

• It must be fair, reasonable and just to impose a liability.

If you introduce a client to a ‘tax efficient’ scheme for which you receive a fee, unless you have specific and agreed letter of engagement that sets out what it is that you are doing together with the terms and limitations of your services, then you are opening yourself up to a potential problem should that scheme fail and your client suffers a financial loss.

Without a specific, separate and agreed letter of engagement the implied scope of your responsibility even if you are merely introducing will take into account that you are (potentially) advising on:

• The potential application of GAAR.

• The implications to the client, including their tax return and disclosures under DOTAS.

• The risk of a challenge by HMRC.

• The risk to the client’s reputation if the planning came into the public arena.

• The legal interpretation that is being relied upon.

• The implications to the individual and the business in the event of a prolonged dispute with HMRC.

As an accountant, it would be difficult to sustain an argument that you introduced a client to a scheme promoter on the basis that he was a grown up who ought to check things out for himself. It is therefore vital that a written record is kept of advice given or introductions effected and I urge you again to have a properly constructed letter of engagement.

• Rob Ward is Managing Director of PI insurance specialists Sennet. Call 01227 781200 or email [email protected]

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk  or email [email protected]  or by phone on 0800-074-2896

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